Delta, SkyTeam offer $1 billion to Japan Airlines

AP News
Posted: Nov 18, 2009 7:32 AM

Delta Air Lines and its alliance partners said Wednesday they are making a billion dollar offer to lure loss-making Japan Airlines from its affiliation with American Airlines.

Delta is "by far the strongest partner for Japan Airlines," company president Edward Bastian told reporters in Tokyo, escalating the tug-of-war for a minority stake in Japan's flagship carrier.

The offer from Delta and the SkyTeam alliance includes a $500 million capital investment, $300 million in short-term revenue guarantees, and $200 million in asset-backed financing for the airline, known as JAL.

SkyTeam would also cover the entire cost for Japan's flagship carrier to transfer from American's oneworld alliance, estimated by Delta to total $20 million.

The stakes are high for both Delta and American, a unit of AMR Corp., as they seek to expand their international reach through global partnerships. JAL, Asia's biggest airline, is particularly attractive because of its extensive routes in Japan and China.

By partnering with JAL since the mid-1990s, American has been able to sell those routes to its own customers and share in the revenue. American and JAL offer reciprocal frequent-flier privileges to each other's passengers.

But JAL is struggling, and the Tokyo-based airline desperately needs an injection of capital and government help to avoid collapse.

It said last week it booked $1.5 billion in losses for the first half of the current fiscal year and was seeking government assistance in dealing with its creditors. Its interest-bearing debt totals nearly $10 billion.

Hit by a downturn in travel brought on by the tepid global economy and the swine flu outbreak, the company has been approved for a government-run turnaround. It is mulling large job cuts after already lowering its staff mainly through attrition as well as taking other measures such as cutting unprofitable routes.

Japan Airlines spokesman Sze Hunn Yap said the company is aware of Delta's offer but could not comment.

Bastian said JAL's relationship with the oneworld alliance has hurt the airline, with flights between North America and Japan decreasing in recent years.

In contrast, joining SkyTeam would offer JAL access to the 3.7 million Delta customers that fly every year from the U.S. to Japan. That represents a more than threefold increase from American's current passenger traffic out of the U.S. and $400 million in higher annual revenue, Bastian said.

"Continuing its current partnership threatens JAL's long-term international competitiveness," he said. "Only through a partnership with SkyTeam and Delta will JAL have the strength it needs to regain a position of international leadership in Japan, Asia and across the globe."

American Airlines and Texas-based private investment firm TPG Inc. issued a statement Wednesday reiterating their commitment to JAL, saying that sticking with oneworld would be its best path toward recovery and future growth.

American claims that JAL would suffer up to $500 million in lost revenue over two years if it defects to the SkyTeam alliance. It says it could win regulatory approval by mid-2010 for even closer ties _ antitrust immunity that would let American and JAL collaborate when setting prices and schedules on U.S.-Tokyo flights.

"American and its partner, TPG, stand ready to deliver significant value to JAL through a strengthened commercial relationship that will be part of a comprehensive recovery plan _ if invited, welcome and deemed appropriate by JAL and the Government of Japan," they said.

The Nikkei financial daily reported Wednesday that TPG is looking to invest $1.1 billion in JAL as part of a coordinated effort with American Airlines.

JAL president Haruka Nishimatsu has said he wants to make a decision on any capital tie-ups by the end of the year.

The SkyTeam alliance includes Delta, Air France KLM, Aeroflot, AeroMexico, Alitalia, China Southern Airlines, Czech Airlines and Korean Air.

Delta's offer came after a rough day for JAL shares in trading on the Tokyo Stock Exchange. Investors dumped the issue after comments by transport minister Seiji Maehara suggested that legal liquidation of the airline was still on the table.

JAL tumbled 3.9 percent to a record-low finish of 98 yen.

Takahiko Kishi, an analyst for Mizuho Investors Securities, said who actually invests in JAL may be less important than the restructuring it must undergo.

"Its financial health is so precarious," he said. "It has many issues it needs to address."

Delta and the SkyTeam's support stands firm even if JAL faces bankruptcy, Bastian said.

"Our offer is unconditional," he said.